Jan de Vries, The Economy of Europe in an Age of Crisis, 1600-1750. New York: Cambridge University Press, 1976. xi + 284 pp. ISBN: 0-521-29050-3.

Review Essay by George Grantham, Department of Economics, McGill University.

An Economy in Crisis

First published in 1976, The Economy of Europe in an Age of Crisis was chronologically the fourth in a series of general syntheses of European economic history commencing with Robert Lopez’s account of the medieval economic boom and carried forward by Harry Miskimin’s two volumes on the economic history of the Renaissance.1 The four works by two Yale professors of economic history and one of their students constituted as it were a ‘Yale’ history of the European economy, which was distinguished from other works by its attention to macroeconomics and the implications of general equilibrium. One recalls hoping for an ultimate volume from the pen of Yale’s other senior economic historian that would bring the story out of Europe to America and through the Industrial Revolution to the mid-twentieth century. Alas. The hungry sheep look up and are not fed. … Weep no more, woeful shepherds.

Jan de Vries’ contribution to this series deals with a particularly enigmatic period in the history of the European economy. The Age of Crisis began as a prolonged recession during which the older centers of economic growth, strung out like beads on a strand extending from the cities of Northern Italy to the trading and manufacturing towns of Flanders, fell into a deep economic sleep from which they were not roused until the coming of the railway. Elsewhere, sectarian violence, civil war and repeated incursions by Turkish troops ravaged vast regions of central and eastern Europe into the first decade of the eighteenth century; from the 1660s to 1713 commercial and real warfare between France, England and the Low Countries perturbed Europe’s most prosperous economies. Sovereign default occasioned by the financial burden of these conflicts ruined financial intermediaries; the supply of money declined and prices fell; population grew hardly at all and in some places actually declined. The paradox is that from this age of social and economic turmoil emerged an Industrial Revolution and the onset of sustained economic growth. The question addressed by The Economy of Europe in an Age of Crisis is how could this have happened. The answer is summed up by an aphorism and a label. The aphorism – ‘The division of labour is limited by the extent of the market’ — was Adam Smith’s; the label — an ‘Industrious Revolution’ — belongs to Jan de Vries.

To appreciate the how difficult it was in the early 1970s to explain how an economy of growth could emerge from an economy in crisis one must know something about the contemporary state of early modern economic historiography. The literature dealing with economic and social development between 1500 and 1800 fell into four broad classes: studies inspired by the stages theory of economic evolution, which were mainly concerned with the evolution of business and commercial organization; a literature on Mercantilism, which focused on economic policies of states and the attitudes and ideas that informed them; a literature centered on population, prices, and wages, which emphasized the Malthusian/Ricardian agricultural constraint on pre-modern economic growth; and a Marxist literature that viewed the period as the crucial transition from feudal to capitalist society. None of these approaches — with the latent exception of the Marxist labor theory of value — embodied an endogenous model of how the economy changed. Change came from outside the ordinary workings of the economy. Monographs on the economic history of particular industries and regions took the general economic context as exogenously given, as did the Malthusian literature, which interpreted falling wages and rising rents as infallible signs of overpopulation in an economy characterized by fixed production possibilities. Broader treatments like Braudel’s Material Civilization (1967) on the other hand, envisaged the period as a struggle between an aggressively expanding capitalist sector and agricultural traditionalism. Apart from some discussion of the relation between price levels and the supply of money, there was little economic analysis of factors affecting the general equilibrium of the economy.

The stages theory was the foundation of most narrative accounts of the period. As is well known, it hypothesizes a chronological taxonomy of economic forms or ‘stages’ that purports to describe in a generalized way how the western national economies progressed from familial and tribal self-sufficiency in the early middle ages to the economy of large-scale industry and international specialization of the nineteenth and early twentieth centuries. In the canonical sequence of stages the economies of early modern Europe occupy an intermediate position situated somewhere between the urban guild economy of the later middle ages and the industrial economy of the nineteenth century. The narrative thus emphasized the organizational response of urban and rural industrial enterprise to growth in trade, which was not explained but simply assumed to have happened for reasons of its own. The analysis of agricultural evolution was largely confined to the description of settlement patterns and modes of tenure. In the degree that the period was defined by the ‘stage’ attained by the most progressive nations, it was characterized by the expansion of municipal and regional market economies to a larger national level of aggregation.

Part of the appeal of this typology to the German historical economists most closely associated with it was its historical justification of protectionist policies accompanying Germany’s political unification in the nineteenth century, which combined reduced barriers to domestic trade with increased tariffs on imports from other countries. The departure from the abstract precepts of the theory of comparative advantage were rationalized as measures fitting the requirements of an economy that had not yet attained its ‘national’ stage of economic development. This argument was closely related to a relativistic proposition holding that economic motivation also varies across stages, an idea supported by philosophical traditions going back to Hellenistic times and by the striking social and economic disparities between rural and urban societies and between Europe and the underdeveloped world. The very magnitude of these disparities, however, caused scholars to conflate the supposed continuum of economic stages and behaviors into a dichotomy that contrasted a traditional rural sphere where social values and institutions worked to reproduce self-sufficient and self-sustaining communities, and a modern urban one where actions were motivated by the individualistic goals of social advancement and wealth maximization. This vision, which is most fully articulated in the sociologies of Emile Durkheim and Max Weber and which survives in the economic anthropology of Karl Polanyi and his followers, was adopted by the influential Annales historians as the central framework of their history of social and economic evolution. In the words of Braudel, the early modern economy was comprised of “two universes distinct from each other” — a rural world ruled by instinct and habit; and an urban world of “energy, innovation, new awarenesses, and even progress.”2 Economic and social development thus unfolded as a war between two mutually antagonistic worlds. This Manichean vision of social and economic process clearly left little space for the analysis of economic complementarities between town and countryside. The countryside and small towns were passive recipients of ‘energy’ emanating from the city. Metaphors like this provided little guidance as to how that energy was channeled, nor exactly how it was generated.

The second strand in early modern economic historiography revolved around the idea of Mercantilism. Coined by Adam Smith as an Aunt Sally, the term experienced rebirth in the late nineteenth and early twentieth century in works by economic historians like Schmoller, Cunningham, Ashley and Lipson, who held that the international division of labor reflected the unequal capacity of competitive nation states to protect their economic interest. To them the early modern period represented an age when princes tried to protect their people from the disquieting effects of rapid economic and social change. This rosy view of the paternalistic and authoritarian policies of seventeenth- and eighteenth-century government, which was advanced as a model for the paternalistic policies of the national welfare state, was devastatingly criticized in a monumental study by the Swedish economist Eli Heckscher, and in a comparative analysis of early modern France and England by the American economic historian John Nef.3 As the policies in question were quite diverse, the ensuing debate mainly emphasized questions of definition. Exactly what was Mercantilism? The quantitative significance of specific policies could not be analyzed given the limited available documentation, so the debate shed little light on the causes of economic change, although there are topics in this general sphere of enquiry that are more immediately fruitful of insight into this topic than the analysis of industrial and commercial regulations, most of which were easily circumvented. The first is the economic and administrative response to the transfer problem created by central taxation of rural districts; the second concerns the impact of military provisioning on the organization of the wholesale trade in cereals and other materials that were cumbersome to transport and costly to store. The Age of Crisis was an age of rising taxation and growing armies and navies. Neither trend could fail to affect industrial and commercial organization.

The third strand of economic historiography was unreservedly quantitative. Since the 1930s an international effort to collect prices and wages for the period prior to 1800 had provided numerical data that seemed to bear out the Ricardian hypothesis of an inverse correlation between movements in population and real income, which was explained as the joint consequence of a fixed supply of land and a static agricultural technology. By the 1970s compilations of crop yields and yield ratios further supported the impression that outside a few exceptional districts agricultural technology and agricultural productivity were indeed mired. At the same time, however, the price data indicated a positive correlation between the price of cereals relative to meat and dairy products, and growth in population. This was explained by the higher income elasticity of demand for animal products than for subsistence cereals; when population increased, real per capita income declined due to diminishing returns in farming, causing demand for meat and dairy produce to fall faster or rise more slowly than the demand for grain. Since scattered observations of the amount of land in different kinds of crops indicated a rise in the output of livestock products in periods when their relative price was increasing, the apparent increase in the output of the pastoral sector and the diffusion of forage legumes after 1650 could plausibly be explained as a consequence of demographic stagnation, which in the context of an unexplained upward drift in overall productivity generated the increase in per capita income needed to support the rising relative price of livestock. The difficulty with this demographic explanation of shifts in demand was that it didn’t explain how demand and agricultural production could increase in an otherwise stagnating economy, in which demand for all kinds of produce should have been contracting. Output had risen in a period when incentives to increase it seemed weak. The Ricardian paradigm was incomplete.

The final strand of the economic historiography suffered from no such logical misgivings. Marxist historians viewed the seventeenth century as crucial to the transition from ‘feudalism’ to capitalism. The defining event was the long English Revolution that began in the late 1620s and culminated in the substitution of a Dutchman for King James II in 1688. To English Marxist historians, the six decades represented the original ‘bourgeois’ revolution, which instituted political preconditions for capitalism. The crucial preconditions were the expropriation of the peasantry by Parliamentary acts of enclosure and the creation of a free labor market by the enactment of laws and judgments limiting the right of rural laborers to seek work outside their home parishes and the removing the right of all workers to combine in defense of wages and working conditions. Relieved of paternalistic regulations promulgated by Tudor and Stuart monarchs intended to protect peasants and maintain social stability, English landlords and businessmen could create a subservient force of free labor exploitation that was the source of the capital on which rested England’s later industrial supremacy. The crisis of the seventeenth century planted the seeds of capitalism and the industrial revolution. In a variant of this argument Wallerstein argued that the capital-creating surplus was extracted not so much from domestic labor, but from serfs and slaves in peripheral regions. Economics followed politics.

None of this added up to a theoretically coherent account of how the economy of the seventeenth and early eighteenth century gave birth to sustained economic growth. The stages literature described the changes in industrial organization, but could not explain them; the debate over mercantilism and the role of the state was virtually devoid of economic analysis of cause and effect. The Malthusian approach was more promising, and by the 1970s had been reinforced by outstanding regional studies in early modern agriculture and better demographic information, but the analysis was typically couched in terms of the tension between population and resources, and ignored the implications for agricultural productivity of farm specialization induced by the growth of cities and rural industrial districts. The Marxist approach focused on the evolution of social classes and politics.

The facts are that by the middle of the eighteenth century, the economies of the Netherlands, England, and in lesser measure France were significantly larger than they had been a century and a half earlier. Although some technical change had occurred, it was not enough to explain the apparent growth in output and productivity, since most production was done with the old techniques, albeit on a larger scale. The source of growth therefore had to be increased inputs. One input, however, could not have increased. Although population had expanded, the land available to supply it with food, fuel and building materials had not, which implies that the positive effect of a larger labor force should have been offset by diminishing returns. But in regions of Europe where population was rising, the standard of living — as evidenced by the kinds of goods people had in their homes when they died — had apparently increased.

De Vries’ proposed solution to the problem of how growth could proceed in the face of diminishing returns involved two correlations. The first was a regional correlation between the rate of urbanization and agricultural productivity. A survey of the agricultural regions of Europe reveals that places where the urban economy thrived were also places where agriculture prospered. In the Dutch Republic and southern England, the growth of Amsterdam (and other Dutch cities) and London created new incentives for nearby farmers to intensify and ameliorate methods of cultivation. It is now known that similar incentives had similar effects in other regions, most notably on the great farms that supplied Paris with grain and straw. By contrast, farming in the hinterlands of the declining Italian, Flemish and Iberian towns stagnated. Both economic logic and the price data indicate that the causal link runs from changes urban demand to changes in rural supply, rather than the other way round. De Vries also argued the traditional hypothesis that pre-existing differences in agrarian structure affected the rural response to changing market opportunity. The evidence for the exogeneity of rural institutions, however, is less convincing than the regional correlation between urbanization and agricultural productivity, as the regions where agrarian structure permitted an elastic response to market opportunity had the strongest market incentives to adjust agrarian institutions to that opportunity. In one part of the world such responses may nevertheless have worked to limit the range of subsequent response to economic opportunity. In Eastern Europe and in the American tropics, landowners used their political authority to solve the problems of growing labor scarcity caused by growing demand for produce by subjugating the labor force.

The second suggestive correlation is between urbanization and interregional trade. Between 1600 and 1750 much of the long-distance trade of Europe came to pass through a handful of entrep?ts situated on the southwest margins of the North Sea. Although geographical factors determined that this region would contain nodes of exchange between the Baltic and the Western Atlantic, it was the spatial economies of scale in distribution and exchange of economically useful information that caused them to capture the lion’s share of Europe’s trade with other continents as well as a significant share of her internal commerce. The entrep?t trade attracted related industries processing exotic materials and servicing the shipping and financial sectors. The growth in population supported by these activities was so large that it created a market large enough to induce economies of scale in production, of which the counterpart was rising real returns to capital, land and labor. De Vries noted that unlike other parts of Europe, where population growth lowered real wages, in urbanizing Holland and England it raised them. The land constraint was not absolutely binding. Spending the higher incomes created an effective market demand for more expensive kinds of farm produce, textiles and housewares, and so diffused the prosperity of the town into the countryside. The dynamic thus reflected the reciprocal relation between the extent of the market and the division of labour summarized by Smith’s famous maxim.

Economies of scale resulting from the concentration long-distance trade and related activities into a smaller number of large cities, however, could not fully explain how an economy in crisis could generate points of economic progress and prosperity. The major exogenous event in this century and a half of slowly growing population and imperceptibly improving technology was the colonization of North and South America and the growth of trade with Asia. The chief products of this expansion in Europe’s commercial space was increased supply and falling prices of exotic commodities, some of which are highly addictive. Unlike traditional commodities manufactured locally or within the household economy of peasant families, exotic goods and the cheaper kinds of manufactures available through trade had to be paid for with cash, which in the steady state could only be earned by exporting more goods to the urban sector. This, plus the demand for cash to pay increased taxes, explained why the extra rural income was not dissipated in leisure. The advent of exotic commodities and cheap manufactures changed tastes in a way that shifted the supply of labor, enterprise, and most likely capital, outward.

How, then, did the economy of crisis become an economy of growth? Part of the answer was the end of civil and religious warfare in Germany and the stabilization of government in France and England after 1720, which provided a period of comparative calm during which population could begin to grow again and the web of financial intermediation could be re-knitted. The continued growth of long-distance trade with Asia and the accelerated expansion of the European colonies in the New World imparted a further positive impetus, though its main effects happened late in the day. In the first century of the age of crisis the most important source of long-term growth was the dynamic scale economies associated with the concentration of trade and related activities on a handful of cities in Northern Europe. At first the growth of Amsterdam and perhaps London was at the expense of older centers like Antwerp, Venice and Genoa, but as overall activity stabilized and began to grow again after 1713, falling transaction and distribution costs fell throughout the continent. Declining costs of manufactured and imported goods improved the rural terms of trade, and induced more agricultural and industrial production in the countryside. The growing trade financed the improvement of transport facilities linking town and countryside, and provided the means of greater financial integration. The crisis, then, was in many ways a tipping event that led Europe’s economy to a new geographical and economic equilibrium. An important and as yet unanswered question is whether in the absence of the negative shocks of the seventeenth century the tipping would have favored southern Europe and the developing spine of development in central and western Germany, which were to be the heartland of Europe’s nineteenth-century industrialization.

Despite criticism from Dutch economic historians wedded to the Malthusian paradigm, De Vries’ economic model of the early modern transformation of the European economy has stood up well. Based to a large extent on the Hymer-Resnick model of gains from trade to be had from the specialization of rural households on agricultural production, and on Adam Smith’s scale economies, De Vries’ account of the dynamic returns to scale in the early modern economy found support in the arguments for increasing returns embedded in the economics of coordination failure and in the new trade theory of the 1980s and the early 1990s. In this respect, the book was ahead of its time. An Economy in Crisis has also influenced the reconstruction of Chinese economic history, where a similar dynamic has been found to operate with similar results.4 According to Kenneth Pomeranz a market-based division of labor in eighteenth-century China supported living standards comparable with the European standard of 1750.

One of the overlooked merits of this account of early modern economic development is its denial of the inevitability of an Industrial Revolution. Smithian trade dynamics could lift productivity for a long time, but not forever; it could alone give rise to the fundamental technological breakthroughs that have sustained economic growth since the late eighteenth century. Perfect property rights and easy trade might actually limit incentives to innovate by providing tradable substitutes for intellectual effort. These notions underlie Pomeranz’s assertion of an eighteenth-century Chinese ceiling that led to what he calls the Great Divergence. According to De Vries, the exceptionally commercialized Dutch economy was bounded by a similar ceiling.

As is to be expected some parts of the book have held up less well than the general model. The agricultural discussions are dated; it is now clear that French agriculture was more productive and less static than the accounts on which De Vries based his discussion indicated, and it appears that traditional husbandry was capable of supporting a more elastic supply response than was then believed to be possible. The role of structural determinants of regional differences in agricultural productivity is also problematic. The discussion of the role of rural industry in creating a proletariat reflects historical debates of an earlier time, and ignores the agricultural implications of a growing non-agricultural population. The analysis of the financial sector, including the evolution of commodity moneys, is less sophisticated and detailed than one would demand today. In particular, a new edition would have to incorporate the insights into public finance derived from the theory of rational expectations and the theory of games. A modern, longer treatment would also probably pay more attention to what one might call business cycles, bringing the short run back into the story of the long one. The study of population dynamics in this period has also progressed from its state in the early 1970s, and much more is now known about the role of women in the economy. A new edition would extend the discussion of technological change to the development of scientific institutions and scientific publishing. Nevertheless, it is surprising how well the book holds up. A recent textbook by Robert Duplessis covering the same ground has little more to say except in having more detail.5

In its modest way, The Economy of Europe in an Age of Crisis has made a signal contribution to the way we think about pre-industrial economic development. One might argue that the dynamics the book expounds are based on the atypical experience of a few rapidly growing regions; but this is the nature of dynamic economies of scale. They gather in business and enterprise from other places. One of the unanswered questions is how fragile was this trade-based growth. Was it rooted in the irreversible expansion of colonial trade, or did its continuance depend on the maintenance of stable trading relations? How integrated was the European economy of the seventeenth and early eighteenth century? How vulnerable was it to monetary instability? How close did it come to coming unraveled in the dark years between 1640 and 1660, and again between 1690 and 1713? How important for the subsequent growth of the European economy were the stabilization of finances and the political tranquility of Europe’s largest nation (France)? Exactly how crucial was the growth of population and production in North America? These are questions to which we still lack answers. That we can ask them is a tribute to the achievement of this remarkable little book.

Notes:

1. See Robert S. Lopez, The Commercial Revolution of the Middle Ages, 950-1350, Cambridge (1971); Harry Miskimin, The Economy of Early Renaissance Europe, 1300-1460, Cambridge (1969); and Harry Miskimin, The Economy of Later Renaissance Europe, 1460-1600. (Cambridge (1977).

3. Eli Heckscher, Mercantilism, London (1935); John U. Nef, Industry and Government in France and England, 1540-1640, Ithaca (1964).

4. Philip Huang, The Peasant Economy and Social Change in North China, Stanford (1985); R. Bin Wong, China Transformed: Historical Change and the Limits of European Experience, Ithaca (1997); Kenneth Pomeranz, The Great Divergence: Europe, China, and the Making of the Modern World Economy, Princeton (2000).

5. Robert S. Duplessis, Transitions to Capitalism in Early Modern Europe. Cambridge (1997).